oversight

The Huntington Housing Authority, Huntington, WV, Did Not Properly Allocate Salary Costs to Its Affiliated Nonfederal Entities

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-12-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                Issue Date
                                                                       December 2, 2004
                                                                 Audit Report Number
                                                                      2005-PH-1002




TO:        William D. Tamburrino, Director, Baltimore Public Housing Program Hub,
            3BPH


FROM:      Daniel G. Temme, Regional Inspector General for Audit, Philadelphia Region,
            3AGA


SUBJECT:   The Huntington Housing Authority, Huntington, WV, Did Not Properly Allocate
            Salary Costs to Its Affiliated Nonfederal Entities


                                  HIGHLIGHTS

 What We Audited and Why

           We performed an audit at the Huntington Housing Authority (Authority) in
           response to a complaint. The complainant alleged various irregularities at the
           Authority mostly related to its business dealings with its affiliated nonfederal
           entities. Our audit objective was to determine whether the Authority properly
           used HUD funds to develop and support its affiliated nonfederal entities.

 What We Found


           While the Authority was generally prudent and did not guarantee debt of its
           affiliated nonfederal entities, it sometimes improperly used HUD funds to develop
           and support its nonfederal entities. Specifically, it did not allocate all relevant
           salary costs to its affiliated Housing Development Corporation, contrary to its
           Annual Contributions Contract. As a result, from July 1999 to June 2003, the
           Authority improperly paid salaries estimated at $320,524 from federal funds for
           work its employees performed for this nonfederal entity. We also estimated that
           in the future, the Authority will be able to better use $46,371 annually by properly
           accounting for and allocating the work its employees perform for its nonfederal
           entities.

What We Recommend


           We recommend HUD require the Authority to recover $320,524 from the
           Housing Development Corporation for employee salary expenses not properly
           allocated to the nonfederal entity or repay it from nonfederal funds. We also
           recommend the Authority develop a reasonable method for allocating its future
           cost to its nonfederal entities, thereby putting $46,371 to better use annually.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We discussed the report with the Authority during the audit and at an exit
           conference on October 26, 2004. We asked the Authority to provide a response to
           our draft report on November 3, 2004, and it provided a written response on
           November 19, 2004. In its response, the Authority agreed with our finding that it
           did not develop a formal cost allocation plan but disagreed with our estimated
           questioned costs.

           The complete text of the Authority’s response and our evaluation of that response,
           excluding the exhibits, can be found in Appendix B of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
      Finding 1: The Authority Did Not Properly Allocate All Relevant Salary Costs   5
      to Its Affiliated Nonfederal Entity

Scope and Methodology                                                                9

Internal Controls                                                                    10

Appendices
   A. Schedule of Questioned Costs and Funds Put to Better Use                       11
   B. Auditee Comments and OIG Evaluation                                            12




                                             3
                     BACKGROUND AND OBJECTIVES

The Huntington Housing Authority is a public body created under the General Statutes of the
State of West Virginia. The Authority was created to provide safe and sanitary housing for the
low-income citizens of Huntington and Cabell County, West Virginia. The mayor of the city of
Huntington appoints a five-member Board of Commissioners to govern the Authority. The
current Board Chairman is J. Edgar Shaffer. The current Executive Director is William Dotson.
The Authority is located at 300 Seventh Avenue in West Huntington, West Virginia.

The Huntington Housing Authority owns and manages 927 public housing units and provides
rental subsidies for over 1,300 units under its Consolidated Annual Contributions Contract with
HUD. The Consolidated Annual Contributions Contract defines the terms and conditions under
which the Authority agrees to develop and operate all projects under the agreement. HUD
authorized the Authority the following financial assistance from July 1999 to June 2003:

   •   $7.5 million Operating Subsidy to operate and maintain housing developments;

   •   $6 million Capital Fund Program;

   •   $18.7 million to provide housing assistance through Section 8 funding; and

   •   $229,722 Public Housing Drug Elimination Program.

West Virginia state law allows housing authorities to form and operate nonprofit corporations.
However, the Authority’s Consolidated Annual Contributions Contract with HUD requires it to
maintain records identifying the source and allocation of its funds and it must only spend federal
funds in accordance with the regulatory requirements of each specific federal program.

The Authority established a nonfederal entity known as the Housing Development Corporation
in 1997 to promote and advance decent, safe, and sanitary housing for persons of low- and
moderate-income, the elderly, disadvantaged or infirm in the Cabell-Wayne Counties and
surrounding areas of West Virginia. The Housing Development Corporation acts in concert with
the Authority and other organizations to provide services for the development and management
of affordable housing projects and related undertakings. A nine-member Board of Directors
subject to approval of the Authority runs the Housing Development Corporation with no less
than three directors from the Authority’s Board of Commissioners. The President of the
nonfederal entity is the same as the Executive Director of the Authority, William Dotson.

The Housing Development Corporation had income of $7.3 million from July 1999 to June
2003. It derived its income primarily from construction and repair contracts, management of
housing facilities, grants, and loans. Our audit objective was to determine whether the Authority
properly used HUD funds to develop and support its affiliated nonfederal entities.



                                                4
                                RESULTS OF AUDIT

Finding 1: The Authority Did Not Properly Allocate All Relevant
Salary Costs to Its Affiliated Nonfederal Entity
The Authority did not properly allocate all applicable salary costs to its affiliated nonfederal
entity, contrary to its Annual Contributions Contract. This occurred because Authority officials
erroneously believed the management fees it earned from the nonfederal entity covered all
expenses incurred. Our review showed the Authority improperly paid salaries totaling $320,524
from federal funds from July 1999 to June 2003 for work its employees performed for its
nonfederal entity. We also estimate the Authority will annually put $46,371 to better use by
properly accounting for and allocating work its employees perform in support of its nonfederal
entity.




   Authority Improperly Paid
   Salaries of Its Nonfederal Entity


              The Authority used a number of employees to provide support to its affiliated
              Housing Development Corporation that it did not properly account for in its
              books. Specifically, our review showed that the Authority did not properly
              allocate salaries and fringe benefits of at least 17 employees that performed work
              for its affiliated Housing Development Corporation. The Housing Development
              Corporation awarded 12 of these 17 Housing Authority employees bonuses
              totaling $62,600 in August 2002 and December 2003 for their service to the
              nonfederal entity. While we did not identify anything improper related to the
              bonuses, the bonuses indicated that these employees provided a substantial level
              of support to the nonfederal entity.

              Authority officials did not allocate the salaries of these employees to their
              nonfederal entity because they believed the management fee the Authority
              received from the entity was adequate to pay for the services it provided. This
              was not so. In this regard, the Authority provided us a list of payments it received
              from its Development Corporation that totaled approximately $56,000 from July
              1999 to June 2003. However, officials could not adequately explain the
              methodology they used to compute the payments, or provide support for the
              payments. Further, the payments listed were often described as compensation for
              items such as tools, fuel or equipment and weren’t intended to pay for salaries.




                                               5
                    The Authority’s Consolidated Annual Contributions Contract with HUD requires
                    it to maintain records identifying the source and allocation of its funds. This key
                    management control is critical to ensure the Authority spends federal funds,
                    provided through its Annual Contributions Contract, only in accordance with the
                    regulatory requirements of each specific federal program. Further, the contract
                    specifies that the Authority can only withdraw federal funds for the payment of
                    costs associated with the development and operation of projects under its Annual
                    Contributions Contract or other projects specifically approved by HUD. Thus,
                    when employees work on multiple programs, a distribution of their salaries should
                    be supported by personnel reports or equivalent documentation.

                    Office of Management and Budget Circular A-87 also requires the Authority to
                    assign costs to benefited activities on a reasonable and consistent basis. Formal
                    accounting and other records should support all costs and other data used to
                    distribute the costs included in its cost allocation plan, including the support
                    needed to establish the propriety of the costs assigned to the federal awards.

                    Since the Authority did not have an allocation plan to properly account for work
                    its employees performed at both its federal and nonfederal entities, we estimated
                    the total salary and fringe benefits that the Authority paid to support its nonfederal
                    entities based on the cash flow of the two organizations. In developing our
                    estimate, we first estimated the percent of income that was attributable to the
                    nonfederal entities related to the combined income of both organizations. For
                    example, in the Authority’s Fiscal Year 2001 (July 1, 2000 to June 30, 2001) it
                    received $9.4 million from HUD. During that same period, the Housing
                    Development Corporation had income of about $4.1 million. Therefore, we
                    calculated that during the period July 1, 2000 to June 30, 2001, about 30-percent1
                    of the salaries and fringe benefits of the 17 employees performing work for the
                    Housing Development Corporation should be paid by this nonfederal entity. The
                    following graph illustrates the percent of cash flow attributable to the nonfederal
                    entities for the four fiscal years2 we reviewed during our audit.




1
    $4.1 million/$13.5 million
2
    The Authority’s fiscal year was July 1 to June 30.


                                                         6
                      Percent of Cash Flow Related to Nonfederal Entities


            35.00%

            30.00%

            25.00%                            30.24%

            20.00%

            15.00%

            10.00%         15.78%

              5.00%                                            6.32%            6.77%
              0.00%
                            2000              2001             2002             2003


          As shown in the graph, the percent of cash flow attributable to the nonfederal
          entities was much higher in Fiscal Years 2000 and 2001. The larger cash flow in
          those first two years is attributable to the Huntington High Limited Partnership.
          The Huntington Development Corporation established this limited partnership in
          March 2000 to acquire, rehabilitate, construct, own, finance, lease, operate, and
          otherwise deal with a 42-unit senior low-income tax credit housing project located
          in Huntington, West Virginia. As such, Authority employees needed to spend a
          larger percentage of their time providing support to this project until it was
          completed in April 2001.

          Using the aforementioned percentages, we estimated the Authority paid $320,524
          from July 1999 to June 2003 from federal funds for salaries and benefits to
          support its nonfederal entities. Also, using the Fiscal Year 2003 percentage of
          6.77 percent we conservatively estimated that in the future the Authority will be
          able to better use $46,371 annually by properly allocating salaries to its
          nonfederal entities.

Recommendations



          We recommend HUD:




                                          7
1A. Require the Authority to recover $320,524 from its nonfederal entity for
    employee expenses not properly allocated to its nonfederal entity or repay it
    from nonfederal funds.

1B. Require the Authority to develop a reasonable method for allocating its
    future costs for services performed by its employees in support of its
    nonfederal entities, thereby putting $46,371 to better use.




                                 8
                        SCOPE AND METHODOLOGY


We performed the audit at the Huntington Housing Authority located in Huntington, West Virginia
from March 2004 through August 2004 in accordance with generally accepted government auditing
standards and included tests of management controls that we considered necessary under the
circumstances.

The audit covered transactions representative of operations current at the time of the audit and
included the period December 1997 when the Authority executed a contract with its related
nonfederal entity, Housing Development Corporation, to April 2004. We expanded the scope of
the audit as necessary. We reviewed applicable guidance and discussed operations with
management and staff personnel at the Huntington Housing Authority and key officials from
HUD.

To determine if the Authority properly used HUD funds to develop and support its affiliated non-
federally funded entities, we reviewed:

   •   Financial data from the Authority and its nonfederal entity using audit software.

   •   Employee time cards, Wage and Tax Statements, and employee listings.

   •   Independent Auditor’s Reports for Fiscal Years 2002 and 2003 for the Authority and its
       affiliated nonfederal entity.

   •   Minutes of meetings of the Board of Commissioners for the Authority and its affiliated
       nonfederal entity.

   •   Promissory notes and other applicable documents to determine if the Authority
       improperly pledged or provided guarantees of its assets.

   •   HUD monitoring reviews related to the Authority’s compliance with its Annual
       Contributions Contracts.

   •   Articles of Incorporation and other related agreements between the Authority and its
       nonfederal entity.




                                                9
                              INTERNAL CONTROLS

Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals and objectives. Internal controls include the processes and procedures for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

              •   Safeguarding assets by not encumbering or pledging assets funded under the
                  Authority’s Annual Contributions Contracts with HUD; and

              •   Properly allocating all applicable costs to its affiliated nonfederal entity.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


              Based on our review, we believe the following item is a significant weakness:

              •   The Authority did not properly allocate and account for services performed by
                  its staff for its nonfederal entity.




                                                10
                                     APPENDICES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS
                  AND FUNDS PUT TO BETTER USE

                 Recommendation           Ineligible 1/     Funds to Be Put
                 Number                                     to Better Use 2/
                         1A                $320,524

                         1B                                      $46,371



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state or local
     polices or regulations.

2/   Funds to Be Put to Better Use are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              11
Appendix B

        AUDITEE COMMENTS AND OIG'S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
Comment 2




            13
Comment 3




Comment 4




            14
15
16
Comment 5




            17
18
                         OIG Evaluation of Auditee Comments


Comment 1   The report properly acknowledged that the Authority established a nonfederal
            entity known as the Housing Development Corporation in 1997 to promote and
            advance decent, safe, and sanitary housing for persons of low- and moderate-
            income, the elderly, disadvantaged or infirm in the Cabell-Wayne Counties and
            surrounding areas of West Virginia.

Comment 2   The Authority recognized that it did not develop a formal cost allocation plan as
            required by Office of Management and Budget Circular A-87. However, in
            response to our audit report the Authority calculated a lower estimated questioned
            cost of $56,646. Our audit determined the Authority’s lower estimate did not
            properly allocate to the Housing Development Corporation costs to acquire,
            construct, own, finance, lease and operate the Huntington High Renaissance
            Redevelopment Project. The Development Corporation was the General Partner
            of the Huntington High Limited Partnership that owned the Huntington High
            Renaissance Redevelopment Project. Our audit determined that at least 17
            Authority employees performed work for the Housing Development Corporation
            related to the Huntington High Renaissance Redevelopment Project such as
            keeping proper books of account.

Comment 3   Based on Section VII of the Housing Development Corporation’s Articles of
            Incorporation these background statements in the report are correct. The Articles
            of Incorporation state that the Corporation shall have a Board of Directors
            consisting of not less than three Directors who also serve on the Authority’s
            Board of Commissioners. The Articles of Incorporation also state that all power
            of the corporation shall be vested in the Housing Development Corporation’s
            Board. The Articles further require the Authority’s Board of Commissioners to
            approve the election of any Housing Development Corporation Board member.

Comment 4   The cash flow percentage we estimated for Fiscal Year 2001 included the
            Huntington High Renaissance Redevelopment Project. We addressed this issue in
            our evaluation of comment 2.

Comment 5   The fact that these activities are separate legal entities does not negate the
            Authority’s requirement to properly allocate costs to its nonfederal entities. Also,
            the Authority did not provide documentation needed to support its contention that
            we double counted a developer’s fee in our cash flow estimate. We addressed
            other relevant issues in the Authority’s letter from counsel in our evaluation of
            comment 2.




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